Market Segments

Starting from “outside in”, the creation of the business model is designed with the satisfaction of a defined group of customers in mind.  This is a logical starting point in identifying business model alternatives as it will ensure that we are grouping customers that have common needs, problems or other factors as well as ranking those that have the potential to be “best fit” for your company.

Understanding how your customers “prefer to buy” instructs how we provide access to your product or service.  After all, your routes to market, when determined, are responsible for delivering your value to the intended customer.  How efficient and valuable the channel partner is only valid when the customer confirms the value.  In effect, this tells us whether we can actually afford the partner in the entire chain of delivery.

Thought  given to moving  from segments that are mature and commoditized is also frequently part of this process along with conceiving “Blue Ocean” market spaces (segments that have not yet been identified or defined) also be considered.  Having established and defined  the target segments, sets up the next step in the sequence of conceiving the business model, the value proposition.

Value Proposition

I recognize that the term is an overused and often maligned as “consultant speak”, however the original thinking behind the term is very powerful …and, when understood and applied correctly, can yield an extreme competitive advantage. 

The simplicity of this concept starts with a precise understanding of a customer’s poorly met or unmet needs.  As Osterwalder and Pigneur note in their 2008 HBR article, (see below), the key is understanding with precision and clarity—exactly what “the job is that needs to be done” and narrowing it down to one “job”.  In the end, the better your solution to this “job-needed”, the more compelling value that you will bring to the table… usually to the detriment of your competition.

Revenue/Profit Formula

The business model is a playbook that also captures how money will be made by your organization in exchange for the value received by your customer.  However, the math needed to validate the model does not just end with the profitability side of the equation.  It must also include other factors including revenue (intended volume), cost structure, contribution margin and asset turns. 

Starting on the market side with end market pricing and working backward through channel partners (if any)and your organization, ensures that all costs are visible and accounted for…and that your target margins are attainable.  In short, the business model must prove that it can be monetized successfully.

Resources

To deliver and execute the defined value proposition to your customers requires assets of all types.  Depending on the model, these assets include human resources (and critical competencies), physical assets such as facilities, channels of distribution and financial capability.  Intellectual property may also come to bear on the business model and could provide significant competitive advantage and barriers to competition.

Partnerships would also fall under this category.  These could include channel partners, supply chain partners and any strategic alliances that are deemed necessary and beneficial. The key here is to identify what resources will be required to execute on the value proposition and to fill-in any gaps in resources or competencies that may exist.

Processes/Activities

Existing or new processes must be in place to support the consistent delivery of the value proposition of the business model.  Understanding what those key processes are and ensuring that they are efficient and effective will drive the profitability of the model.  Scalability of the model is highly reliant on processes and activities that are designed and built with the intended capacity in mind. 

Amazon’s business model relies heavily on process and activities that can scale with the needs of the business.  In their most recent earnings report, Amazon reported lower than expected earnings and heavy capital spending on infrastructure (distribution centers, data centers, etc.) but these capabilities and scale will likely position them for superior returns down the line.  Apple’s supply chain strategy is a killer combination of world-class quality and cost competitiveness.

Several publications that I referenced on this subject and that you may also find useful:

Reinventing Your Business Model, Johnson, Christensen and Kagermann. Harvard Business Review, December, 2008

Business Model Generation, Osterwalder and Pigneur. John Wiley and Sons, 2010.